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MYSTERY BEHIND
FOOD PRICE RISEKHEM SINGH
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Contents
Inflation
Food Inflation in India
Major reasons for Food price Inflation
Initiatives to boost Agricultural growth
Real culprit behind Food Inflation
Commodity Futures
Addressing the problem
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Inflation
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A situation in which supply of money increases at a ratemuch faster than the supply of real output.
Always better to have a moderate inflation
Inflation is calculated mainly by wholesale price index
and consumer price index
Inflation can have positive and negative effects on an
economy
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Food inflation in India
Is exactly the rise in the price of food items
Food inflation hit a more than decade high of 20.2% in
the month of Jan 2011.
The present inflationary rate is 11.49%
In India food inflation is calculated on the basis of WPI,
Base year being changed from 1993-1994 to 2004-2005.
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FOOD INFLATION CONTINUE
TO RISE
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The FAO Food Price Index (FFPI) rose for theseventh consecutive month, averaging 231 pointsin January 2011, up 3.4% from December 2010 andthe highest (in both real and nominal terms) since
the index has been backtracked in 1990.
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- Meat - 25% - Dairy 12.5%
- Cereals - 53% - Sugar 13.5%
- Oils & Fats - 64%
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Way the Indians spend
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Major Reasons ForFood Price Inflation
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a
UPTO 45% of Food Wastage Dueto LackOfProper
INFRASTRUCTURE
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MAJOR FOOD GRAINS IMPORTING COUNTRIES SUCH
AS AUSTRALIA ,BURMA , MALAYSIA SUFFERING DUE TO
NATURAL CALAMITIES . THUS CREATING GLOBAL
SHORTAGES AND INCREASE IN PRICES..
AUSTRALIAMALAYISIA
BURMA
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Results In Gradual Reduction In PerCapita
AvailabilityOf SomeOfThe Food Items. For Instance, PerCapita Net AvailabilityOfPulses
Per Day Has Gone Down From Around 60 Grams
DuringThe 1950 To Around 37 Grams In 2010
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RESULTING IN LOW AgricultureProductivity
Compared To The Best In The World SUCH AS
US,CHINA,AUSTRALIA.
India's Spend On Agri-R&D Should IncreaseTo
Around 1% Of Agri-GDP From TheCurrent 0.6 % Of
Agri-GDP.
OLD TECHNIQUE SMALL LAND
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FLOW OF FOOD PRODUCTS
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FARMERAPMCAGENT
RETAILERS CONSUMER
HOARDING
RESULTS
The high margin between wholesale prices and retailsprices.
E.g. - The retail prices of onions mounted to Rs 60/Kg (inDelhi market) during Jan-11, while the wholesale pricestood at Rs 30/kg during the same period
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MINIMUM SUPPORT PRICE
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RESULTS IN FIXED INFLATION
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Who is the culprit behind high Food
Inflation Commodity futures orsomething else ??
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Commodity Futures
An agreement to buy or sell a setamount of a commodity at apredetermined price and date.
Both the buyer and seller are obligatedto buy/sell the agreed commodity.
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How exactly it works
Futures market platforms offer operations through theInternet. Some of them also provide warehousing facilities.
Once after verifying the quality and grade of the produce,
farmer store his produce in these warehouses. He can
visually ascertain the prevailing spot price as also thefutures prices in on the internet.
The farmer can decide to sell at the current price, in which
case he gets the full amount in cash.
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How exactly it works
Or, if he decides to sell at any convenient future date, hegets an advance of about 70-75 per cent of the current
price as also a warehousing receipt, which is a negotiable
instrument.
On or before the contract date, the holder of thewarehousing receipt(i.e. farmer) is assured of getting the
contracted price.
The farmers have no difficulty understanding the scenario
and would rather transact through the futures market .
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A variety of reasons has been cited forhigh food inflation and it is indeed aninterplay of various factors
Political constituencies have argued thatfood inflation is due to the role of futuresmarkets.
Yet, the movement of pulses prices show,the causality between prices and futurestrading is only a myth.
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During the one-year period ofDecember 2008 to
December 2009,spot price of chanaincreased by 12%while that of tur
and urad increasedby 61% and 70%respectively
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So the question arises, If
commodity futures are not at theroot of inflation, what is ??
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1. Price volatility
In localized and fragmented physicalmarkets, information flow remains poorand limited only to influential marketmanipulators
Due to which market-related informationis given too high a premium, leading tounwarranted price volatility
The usual business reaction to pricevolatility is hoarding of the commodity
Thus leading to high Inflation
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2. Fragmented nature of Indian
Agricultural markets
In the name of food security, the bordersseparating Indian states are as stringentin movement of agro-commodities asinternational borders.
Trade in agro-commodities is subject to aplethora of regulations and taxation
Builds up costs of intermediation leadingto cost-push food inflation
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Addressing the problem
Steps to remove the excess of state levelregulations binding agro-commoditiestrade, thus creating a pan- India market,leading to faster and efficient movement
of goods
Debottleneck the agriculture supply chainand bring down intermediation costs.
Targeting futures markets is counter-productive as evidenced in commoditiessuch as pulses
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Contd.
Strengthen the market institutions thattransmit market information in aneffective manner so that agri-commodities are passed on to consumers
with minimal risks
Effective use of various other tools suchas strategic storage, transparent andflexible trade policy, strengthening ofcountrys agricultural marketinginfrastructure
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